Optimal Two-Sided Pricing and Service Introduction Strategies for Competing Platforms

Nowadays, many two-sided platforms are actively launching new services beyond their main service to reach a broader range of consumers (e.g., Amap adding local lifestyle services in addition to its navigation service). As users migrate across different services, the original two-sided pricing mechanisms are altered due to network effects. Furthermore, different service introduction strategies adopted by competing platforms also reshape the competitive landscape. In this article, we develop a game-theoretical model to examine the optimal pricing strategies of two competing platforms when introducing new services. We theoretically show that when platforms introduce new services, they typically reduce consumer-side fees or even offer subsidies. However, on the provider side, whether platforms adjust their pricing strategies depends on the service introduction strategies of their competitors. Counterintuitively, the profitability of new services does not depend solely on their development costs; the intensity of market competition also leads platforms to adopt different equilibrium strategies. When competition is intense, platforms may fall into a 'prisoner's dilemma' when introducing new services. In contrast, when competition is weak, introducing new services is more likely to result in a win-win outcome. Finally, we show that service complementarity increases the likelihood of a prisoner's dilemma but does not affect the win-win outcome. We further extend the analysis by endogenizing the user conversion rate and introducing asymmetric consumer base utility, and show that our main findings remain robust.